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All About a Business Succession Plan

As a business owner, you know that change is inevitable. From team members and company growth to overhead costs, consumer demands, and all things between, your organization is a dynamic entity – flexibly moving and adjusting as the market shifts over time. You have built a resilient company trusted by employees, investors, and customers. But what happens if you, the leader and visionary, decide it is time to move on? In a perfect world, business succession is a smooth transition where most customers and stakeholders are none the wiser about a significant difference at the top level. However, sometimes the leadership change needs to be sudden, maybe for personal reasons like illness or even death, and how do you ensure operations continue and your assets, family, and stakeholders are well-protected? A business succession plan needs to be in place, ready to be executed when needed. Without one, your security, integrity, company, employees, and investors are all at risk. So, what exactly IS a business succession plan, and what does it entail?

At a very basic level, a business succession plan offers step-by-step instructions to guide a company through a change in ownership. Creating such a plan requires a series of financial and logistical decisions to put procedures in place and clearly outline terms for an owner’s departure.

There are 5 common elements to business succession planning:

  1. Establishing a timeline
  2. Determining the successor
  3. Reviewing and formalizing all standard operating procedures
  4. Establishing the valuation of your business
  5. Funding the plan

The Timeline

There are actually two key types of succession plans that should be established: an anticipated exit succession plan and an accident or death succession plan. As one would expect, these might have very different timelines. The exit succession plan should be drafted within five years of the owner’s projected retirement (if not sooner) and would outline a specific date and time for the transition while indicating the owner’s involvement or clean separation moving forward from that date. The accident or death succession plan should be in place as soon as possible, as it will protect your business, stakeholders, and successors in the event of a sudden, unexpected situation.

The Successor

While many business owners choose a family member to follow in their footsteps, they must contemplate what is best for everyone – including the company. Second and third-generation businesses have a high failure rate, so a key employee may be better equipped for a seamless transition and success moving forward. It is more than likely that even a top executive will need some training and leadership development, so as part of your talent management strategy, you will want to identify key positions and employees with the most potential and create a plan to ensure their readiness.  Whether you decide to sell your company or put it in the hands of another family member, there are tax laws to consider, and you will want to engage with experts to optimize profits and minimize liabilities.


The Standard Operating Procedures

Workflow at successful companies moves fast – sometimes with a speed that makes it impossible to detail every step so many processes and key decision-making elements just live in your head. However, if you are no longer available as a reference, your customers are counting on your employees to keep the ball rolling. And whether developing a long-term exit plan or an accident/death business succession plan, you must include information about standard operating procedures or any complex processes for executives and employees to reference after your departure. Some elements to include:

  • An organization chart of the company structure offering employee roles, departments, and reports.
  • Operations information featuring a company overview, project management flow, and daily functions.
  • The Employee Handbook with company policies, benefits, safety, and procedures.
  • IT information detailing software and hardware systems used.
  • Talent development documentation, like training programs, performance management, and any standard trainings post-hiring.

The Value of Your Business

To you, the company you have created, built, and nurtured is priceless. However, it is important to assess the value of your business with an objective eye (and likely the help of a professional), as over-valuation can unpleasantly affect your retirement plans.

The Funding

Taking the “Fun” out of “Funding” is the fact that receiving cash upfront for your business is unlikely, as most buyers will not have liquid assets. Your business succession plan should include specific details for terms of purchase, whether a loan, payment installments or another resource, so it is ensured that your successor can afford the company when your exit date arrives. Once this is decided, you will need to meet with a lawyer to draft a buy-sell agreement, which is a legal document that locks the buyer into the agreed-upon course of action to afford the purchase.

The Dos and the Do Nots

While the reasons WHY to draft a business succession plan and HOW to do so are pretty straightforward, there are a few things that a business owner should keep in mind:


  • Plan ahead. Even if retirement is long in the future, opportunities arise, accidents happen, and you should be prepared.
  • Work with your successor in advance. Prepare them for leadership by developing skills and ensuring they are knowledgeable in all areas of the business (even down to details like passwords), so they are ready to step into your shoes.
  • Recognize that key employees may be better equipped as your successor than your children, and plan accordingly from both a talent management and tax liability standpoint.
  • Revisit your Business Succession Plan yearly. Does it still make sense? Does it need to be revised with new procedures or additions to company policies? Is your chosen successor still the best person for the job? Even small details, like noting operating systems and passwords will likely need to be updated every year.

Do Not:

  • Confuse Succession Planning with Replacement Planning. While they seem similar, Replacement Planning is generally associated with finding temporary back-ups for key positions, rather than permanent replacements that need a different, more lasting, and leadership-oriented skillset.
  • Try to do too much at once. It is easy to get overwhelmed with the details. Start with the basics and flesh out the plan from there.


The End Game

A well-drafted business succession plan should benefit all parties – the business, employees, successor, and of course, you, the departing owner. So, it is imperative to start the process early, so details and determinations can be thoughtfully made before a crisis situation occurs. And engaging the guidance of experienced legal planning professionals can give you peace of mind that you and your business will be taken care of when the time is right.

The attorneys at Lowthorp, Richards, McMillan, Miller & Templeman are here to help you. From estate planning to business succession planning, and all things between, we know what it takes to successfully plan for the future, and we truly care about what is most important to you. Together, we will evaluate your assets, discuss your goals, and work to prepare, provide, and implement options that best serve you, your company, and your family. For more information, we invite you to visit our website, or call us at 805-981-8555. It is never too early to get started.



NOTE: The information contained herein is not intended to be legal advice and the reader should know that no Attorney-Client relationship or privilege is formed by the posting or reading of this article which is also not intended to solicit business.

Cristian R. Arrieta, Lowthorp Richards McMillan Miller & Templeman, A Professional Corporation, 300 E. Esplanade Drive Suite 850, Oxnard, CA 93036